Our team at City Creek Mortgage in Draper understands that if you’re thinking about buying a house for the first time, there are terms you’ll need to familiarize yourself with to get the most out of your home-buying experience.
“Home equity” is one of those terms that homeowners may hear about a great deal and not really understand. Our team believes knowledge is power! We want you to understand the ins and outs of mortgages so that you are confident about your purchase.
The Basics of Home Equity
After you’ve purchased a home and have made payments for a while, the portion of your home that you’ve paid off is considered your home equity. It’s your stake in your home, as opposed to your lender’s stake. Your home equity can be your most valuable monetary asset. Equity usually grows without the homeowner giving it much thought – all you have to do is make your regular monthly mortgage payment.
What is Home Equity – Exactly?
Technically, home equity is the appraised value of your home, minus outstanding mortgage and loan balances. Equity builds over time.
At its most basic, there are two ways to grow your home equity. The more you pay your mortgage, the more you own your home, thereby increasing your equity. If you should make home improvements and increase your appraisal value, you are also growing equity.
For the homeowner, equity is a valuable asset because it can be used as collateral to borrow home equity loans or obtain lines of credit.
How It Works
If you’re a homeowner looking to make expensive home repairs or renovations, or you’d like to consolidate debt, borrowing against the value of your home could be an essential option to consider.
Equity should be considered a financial tool. Homeowners can use equity for loans or tap into it if they’re trying to sell their home. The bigger your down payment and the more you pay toward your mortgage, the more you increase your total equity.
Consider the following steps:
- Build your equity. Make your mortgage payments on time or make home improvements that help increase the value of your property.
- Calculate your equity. To calculate how much equity you may already have, subtract your mortgage balance from your home’s current market value. If you’re unsure about your home’s current value, use an online price estimating tool like Zillow’s Zestimate. If the estimator says your home is worth $300,000 and you still owe $150,000, the estimated equity in your home would be $150,000.
- Learn if you qualify. Typically, lenders require 20% equity, a minimum credit score in the mid-600s, and a debt-to-income ratio below 43% before you can borrow from your home equity.
Common Options for Home Equity Use
Home Equity Loan. Typically, with a home equity loan, you borrow a lump sum amount. Instead of a revolving line of credit, you get the money all at one time – not just as you need it. You’ll still make monthly principal and interest payments. If you choose to pay back the loan over some time, you’ll usually pay it back at a fixed interest rate. Questions regarding the amount of time it takes to pay back your loan and the monthly amount you need to pay back are dependent on how much you borrowed and your terms with your lender.
HELOC. A Home Equity Line of Credit is a revolving line of credit using your home as collateral. The amount of equity you have in your home determines how much money you are allowed to borrow. You can use this line of credit when you need to but have to pay back the amount you borrowed. Usually, HELOCs offer a lower interest rate than a credit card.
Cash-Out Refinance. Sometimes, you can refinance your mortgage for more than what you owe. Known as a cash-out refinance, you’ll receive the difference in cash to use as needed. For example, if your home is worth $400,000, but your mortgage is only $200,000, you may consider a cash-out refinance for a new loan of $300,000. You’d receive the $100,000 in cash, and you’d begin making new, larger mortgage payments.
If you’re unsure about which option works best for you, let’s work together to figure out which option makes the most financial sense for you and your family.
City Creek Mortgage is about more than the bottom line. Our family-owned company knows what it feels like to be starting out and unsure about the future. If you know you want to buy a home but you’re not certain about where to start, you’ve come to the right place.
Our team is committed to helping you feel more confident about the right purchase for you. We built the most trusted, respected, and loved mortgage company in Utah by looking out for our clients. Call us TODAY to feel the difference.